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The term "spread" in finance describes the variation in two prices or interest rates. The gap between the bid and ask prices of a security or asset is what is often referred to as the spread in the context of trading. In contrast to the ask price, which is the lowest amount a seller is ready to accept for the same security, the bid price represents the maximum price a buyer is willing to pay for a security.
The profit a broker or market maker makes from a transaction is represented by the spread. For instance, the spread is $1 if the bid price for a stock is $10 and the ask price is $11. A trader would have suffered a loss equivalent to the spread if they purchased the stock at $11 and later sold it for $10.
Another definition of the term "spread" is the difference between two interest rates, such as the yield on a corporate bond and the yield on a government bond. The difference between these rates can be used to determine the perceived risk of the company issuing the corporate bonds; a wider difference denotes a greater perceived risk.
A smaller spread is often regarded as advantageous for both buyers and sellers because it denotes increased market liquidity and smaller bid-ask margins. Yet, traders who focus on buying and selling stocks with broad spreads may see an opportunity in a wider spread as they may be able to benefit from the price difference.
